11 June 2010
As Congress considers how best to reconcile differences in financial reform and consumer protections, key national advocates recently released updated data on how consumers continue to pay steep rates for small loans. Jointly published by the National Consumer Law Center, Consumer Federation of America and Consumers Union, the 2010 Small Dollar Loan Products Scorecard reveals how much work yet remains at both the federal and state levels to ensure legal protections and enforcements against abusive lending.
"Steep rates for short-term small loans trap borrowers in unaffordable debt," said Jean Ann Fox, director of financial services for Consumer Federation of America. "As consumers struggle to make ends meet in a tight economy, they need protection against rate gouging."
The scorecard analyzed four types of small loans: auto title, payday, six month-installment and one-year installment. According to their metrics, 15 states fail to protect consumers on each product: Arizona, Delaware, Idaho, Illinois, Minnesota, Mississippi, Missouri, Montana, Nevada, New Mexico, South Carolina, South Dakota, Tennessee, Utah and Wisconsin.
The Center for Responsible Lending's (CRL) research has concluded that payday lending is particularly abusive. The short-term and high-costs of payday loans - often 400 percent in annual interest - lead already struggling borrowers deeper into debt. This cycle of repeat borrowing costs American families $3.5 billion per year in fees alone. Moreover, research in California; Arizona and North Carolina have all concluded that minorities are disproportionately impacted by payday loan abuses.
However, 17 states and the District of Columbia have addressed the debt trap of payday lending by capping annual interest rates to about 36 percent or less. In other words, just over one of every three Americans lives free from payday loan debt traps.
In 2010 more states addressed payday and other abusive loan products.
Maryland Governor Martin O'Malley signed legislation that cracked down on payday lenders' attempt to act as "credit repair" agencies. These lenders were charging over 600 percent annual interest, far in excess of Maryland's legal limit of 33 percent.
In Colorado, Governor Bill Ritter recently signed a bill that takes effect August 11 and will reduce the total costs of payday loans in Colorado by two-thirds. The new law also extends the amount of time a borrower has to pay back the loan to at least six months.
Wisconsin Governor Jim Doyle recently used his unique veto authority to effectively ban auto title lending and significantly strengthen an otherwise weak bill.
The Ohio House of Representatives passed legislation that addresses loopholes exploited by payday lenders since voters approved a 28 percent annual interest rate cap in 2008. The bill is now pending before the Ohio State Senate.
The New Hampshire General Court also recently passed legislation that extends their existing payday and auto-title rate cap to all small loans.
Tying all these states efforts to pending federal legislation to address abusive lending, Gail Hillebrand, manager of Consumers Union's DefendYourDollar.org campaign, said in a recent news release, "Congress should make sure that financial reform includes a strong independent watchdog in Washington to protect consumers from unfair lending practices no matter what state they live in. And states should have the power to enforce the law and enact even stronger safeguards."
The Center for Responsible Lending agrees that when it comes to consumer protection, there is an important role for both federal and state officials. The federal government should set meaningful minimum standards and allow states to adopt more stringent protections.
Charlene Crowell is the Center for Responsible Lending's Communications Manager for State Policy and Outreach. She can be reached at: Charlene.crowell@responsiblelending.org
